When Bill Quinlan retired from Enron Corp. after 30 years at its Florida Gas pipeline subsidiary, he had every confidence in the company and its future.
He had accumulated a retirement account that totaled nearly $1 million in company stock, and he figured company stock was the best place to leave it.
"I've been retired eight years, but I kept invested in the company," he said the other day from his home in Corpus Christi, Tex. "I thought it was just as safe as anyplace."
Across the country, thousands of workers and retirees at Enron and many other companies look at their employers much the same way. Given company stock as part of their retirement plan, they not only hang on to it but in many cases buy more through their own contributions to the plan.
In some cases, this has paid off handsomely. But in others, such as Enron, it has not. And what has happened at Enron raises important questions for policymakers and for corporations themselves.
Enron stock, once as high as $90 a share, plunged to 63 cents on Friday. The company filed for bankruptcy protection earlier this month, and it is widely believed that when its case is resolved stockholders will get nothing.
Enron, whose downfall has wiped out or sharply reduced the retirement savings of thousands of its employees, is a case study in the perils of the investment accounts that an increasing number of Americans have come to depend upon for income in their old age.
Enron had a number of retirement plans, some inherited from companies it acquired, including a traditional pension that is insured by the government and that is still operating. It covered some Enron employees, including Quinlan, who said he is now getting "a little over $500" a month from it.
But Enron also had a 401(k) plan and an employee stock-ownership plan (ESOP), two "defined contribution" retirement savings programs to which workers and the company made regular contributions. It is these plans that have received the greatest attention in the wake of Enron's collapse, because it is in them that workers have suffered huge losses.
The losses occurred because workers' and some retirees' accounts were heavily concentrated in Enron stock. ESOPs by their nature, of course, hold company stock, but Enron also fostered concentration in its stock within the 401(k) plan.
The company matched each dollar of employees' contributions with 50 cents in Enron stock, up to a ceiling of 6 percent of pay. It also required employees to leave those matching shares invested in Enron until they reached age 50.
That lock-in was a factor in the losses that Enron workers suffered, for as the stock started downhill, those younger than 50 couldn't sell. But even without it, it appears that those, like Quinlan, who could have fled, didn't.
"Most people have no idea where to invest their money. So they look for some guidance," said Shlomo Benartzi, a professor at the University of California at Los Angeles who has studied worker behavior in defined-contribution plans.
"That guidance can be from what the employer is doing. When the employer invests in company stock, what employees do is invest more" in it, he said.
The Employee Benefit Research Institute, an employer-supported research group in the District, finds that at companies where the employer match must be in company stock, company stock also makes up 33 percent of the portion of the account that is the employee's choice. That is "compared with 22 percent of account balances in plans offering company stock as an investment option but not requiring that employer contributions be invested in company stock," according to an EBRI research paper.
Likewise, the Profit Sharing/401(k) Council of America says that among employers that have company stock in their 401(k) plans, including matches and employee purchases, roughly 35 percent of the plans have less than 10 percent of their assets in company stock, 48 percent of the plans have between 10 percent and 50 percent in company stock, and 18 percent of the plans have more than 50 percent in company stock.
"This is a general phenomenon. Workers think of it as implicit advice, endorsement, guidance," Benartzi said, adding that it is not limited to company stock.
He said he has done surveys that show that if the employer put the match into international stocks, workers put more of their money into international stocks. If the employer matched with a diversified portfolio of stocks, workers put more into such a portfolio.
The tendency to go with the company is reinforced when the company stock does well, as Enron's did for several years. By one calculation, Enron's 401(k) plan returned a total of 326 percent between Oct. 31, 1997, and Oct. 31, 2000.
"Employees tend to look very carefully at past performance [of employer stock], too carefully," Benartzi said. "Enron did very well in the dot-com era. Employees see company stock doing well and they buy it, but very often this is not a good prediction of what will happen" in the future, he said.
Benartzi's surveys also show that workers, for reasons he cannot explain, regard company stock as much less risky than other stocks -- as not even a stock, really.
The risks posed by this concentration go beyond the retirement account. Since the company is also the source of their income, workers who put their retirement funds in their employer's stock are putting all their financial eggs in one basket. If the company gets into trouble, they could end up losing both their paychecks and their savings.
Others, however, point out that concentration can be beneficial. There are many companies whose stock outperformed the market, sometimes by a wide margin, and workers who invested in it and then diversified in retirement did very well indeed.
Concentration "is a long-running issue that only raises its head in bad times," said Karen Field of the Washington office of KPMG, the big accounting firm.
"What you need to think about is, those people [investing in top-performing employer stocks] have done wonderfully well . . . , and if you told employees 'You can't participate in that,' they are not going to be real thrilled," Field said.
The Enron situation has triggered concern on Capitol Hill, in part because of the restrictions that Enron put on company stock in its 401(k) plan.
The prohibition on workers under 50 selling company stock given via the match, though legal and since lifted, has been a focus of these concerns, as has a period during the fall when Enron froze all transactions in its plan. That freeze, however, was temporary, the company said, covering 10 trading days during which the stock declined to $9.98 from $13.81. It came about because the company was changing plan administrators, the company said.
The Enron situation also highlights the difference between the way large corporations often treat their workers and the way they treat executives. Critics have pointed out that while senior executives in the 401(k) plan were subject to the same restrictions, they were able to sell stock they had acquired through options and other compensation packages -- and a number did. Over the past three years, company executives were selling shares by the basketful, dumping, according to one lawsuit, 17.3 million shares and pocketing $1.1 billion.
Officials of the American Benefits Council, a group of large employers, are urging Congress not to rush to restrict use of company stock in retirement plans.
"Undue restrictions on the inclusion of employer stock in 401(k) plans would limit employee investment choice and would deter some employers who today provide matching contributions in the form of employer stock from offering a match at all," the group said in a letter Tuesday to congressional leaders of both parties.
There is an inherent tension in the way today's private retirement system operates. Employers are not required to offer pension plans at all, and indeed fewer than half of U.S. workers are covered by a retirement plan.
Beyond that, employers that offer a 401(k) plan are not required to match employee contributions. Many do, for a variety of reasons, including a desire to persuade workers to participate lest the workers find themselves with inadequate resources to retire.
But what is the match? Is it part of an employee's compensation, or is it found money, more analogous to a gift?
"We haven't really defined who owns the match," and "we haven't decided how paternalistic we want to be," Benartzi said.
"If you viewed the match as a gift or a freebie and not part of the compensation package, the company could do with it whatever it wished," he said. Likewise, "if you are not paternalistic, you could let employees do whatever they want with their money. There's no reason not to open a direct line to a Las Vegas casino."
On the other hand, employee ownership of company stock is widely regarded as aligning their interests with those of the company, providing an additional incentive to work hard and well.
Further, it is often a lot less expensive for a company to match with its stock than with cash, and if forced to use cash, experts say, many companies might abandon the match.
Some already use variable matches that rise and fall with the company's fortunes.
J. Michael Scarborough of Scarborough Group Inc., an Annapolis-based 401(k) plan adviser, said banning company stock from 401(k) accounts isn't realistic, but limiting the allowable amount would make sense, along with giving workers freedom to sell.
"I'm not upset that corporations are giving employees company stock. I do have a problem with them putting a limitation on [workers'] moving out of company stock," he said.
Increased worker education is often suggested as a remedy for poor investment choices. Employers have said they are reluctant to provide anything that could be construed as advice for fear of being sued by workers who felt they have followed it and gotten poor results.
Some in Congress as seeking to ease those fears. A bill by Rep. John A. Boehner (R-Ohio), chairman of the House Education and the Workforce Committee, would allow employers to provide workers with professional investment advice as long as the advisers disclose any fees or potential conflicts.
"I'm in favor of education," KPMG's Field said. If the Boehner bill becomes law, the advice "can be a little bit more blunt" than it is now, she said.
But how effective that would be is uncertain.
"I've had some good advice," Enron retiree Quinlan recalled. "They told me" to diversify, he said. "If I would have taken it when I retired and rolled it into something, I would have been drawing pretty good now."
But optimistic about Enron and distracted by his dying mother, Quinlan left his money in company stock.
"I just screwed up," he said. "I don't need any pity. I just screwed up."
